When Cisco announced its acquisition of Tandberg, it indicated that it had nearly $29 billion of its cash overseas and only about $6 billion in the USA. In light of that ongoing discrepancy between Cisco’s foreign and domestic cash positions, we should expect Cisco to make a greater proportion of its subsequent acquisitions abroad as opposed to in America.
Still, how did Cisco, a company that creates so much of its valuable intellectual property in the USA, end up with so much of its cash overseas? Taxation and the lack thereof are the answers.
Corporate taxes are higher in the USA than in other parts of the world. Cisco sets up subsidiaries all around the world, taking care to structure these subsidiaries so that corporate-wide earnings can be ascribed to subsidiaries in low-tax havens. Cisco can then attempt to repatriate funds to its US-based headquarters.
The problem is, the government looks askance at this practice. The government taxes these repatriated funds, including Cisco’s. In this particular instance, John Chambers and Cisco’s bean-counters have refused to repatriate overseas cash holdings as long as they’ll be taxed on them. The government has held firm, so Cisco looks for acquisitions abroad rather than repatriating its money.
I was resisting the urge to wade into this particular ethical morass, but I’m already hip deep, so let’s take the plunge. Is what Cisco is doing right? Is the government right?
Cisco is blaming the government for refusing to allow it repatriate its overseas cash, but Cisco deserves most of the blame for this predicament. Just because something is legal doesn’t mean it is ethical. In our society, we increasingly lose sight of that important distinction, with increasingly disastrous socio-economic results. Noblesse oblige and enlightened self-interest have become archaic concepts.
Even now, as Cisco shifts jobs from the USA to India and China, most of its value-giving intellectual property is created in the USA. That’s also where Cisco’s headquarters, and the heart of its operational base, is located. Is it right for Cisco to play a shell game with subsidiaries in low-tax havens so that it can avoid paying its “fair share” of US taxes?
Furthermore, is it ethically right for Cisco to then claim that the US government should accord it a tax holiday so that it can repatriate funds that were, in reality, generated primarily from the USA anyway? Cisco wants it both ways, coming and going, all the while transferring jobs to foreign countries.
Meanwhile, John Chambers — whose fiduciary responsibility is to Cisco’s shareholders, not to the US government or to its citizens — blames punitive US tax policies for preventing him from repatriating Cisco’s cash. (Business-minded readers will cavil that I am stating the obvious in pointing out that Chambers answers to Cisco shareholders, not to the US government or its citizens. I agree. My point is that Chambers cannot play uber patriot while acting as shareholder champion. The two roles are not necessarily compatible. Sometimes, in acting in the shareholders’ interest, Chambers’ policies and objectives will run counter to broadly considered American interests.)
The government isn’t perfect, folks, but Cisco has some questions to answer here. Cisco isn’t guilty of any crimes, but we don’t need lawyers to render verdicts in the court of ethical conduct.
Cisco might say: “Well, everybody does it.” As barristers in the UK like to say, that argument might serve to explain questionable conduct, but it does not serve to excuse it.
There are real consequences to this situation, and not only for Cisco. At a time when exit opportunities are few and far between for technology startup companies that can no longer depend on IPOs, Cisco effectively has signaled that it will be looking outside the USA for acquisitions in the foreseeable future. At least in the near term, VCs will know that US-based startup companies are less likely to attract Cisco’s acquisitive gaze. That’s one more reason to shift investments abroad.
Since Cisco traditionally has been a huge force on the buy side of the M&A equation in Silicon Valley and beyond, the implications could be quite significant.
Cisco would like to buy American companies, of course. It doesn’t want to be restricted in how and where it can spend its cash hoard. Then again, Cisco isn’t really the victim here, and it isn’t truly restricted from repatriating its overseas cash. It just doesn’t like the terms the government is offering.
Look, Cisco knew it what it was doing, and it knew all the corresponding tax laws when it set up its overseas subsidiaries. This is a problem that Cisco created for itself. It’s more than a little disingenuous for Cisco to be pointing the finger of blame elsewhere.